Q: Does the outcome of the Greek election bode well for a resolution to the European debt crisis and general economic improvement in the U.S. as well?

Panel's answer: Yes 1 No 7

Although a step in the correct direction, the election results have not fully resolved the European debt crisis or its impact on the U.S. and global economies. Some countries in Europe are caught up in a vicious cycle in which the deteriorating economy weighs on the banks, whose declining fortunes weigh on the government, which moves to slash spending (austerity), hurting the economy. Counties caught in the vortex want those not ensnarled to throw them a financial lifeline. To insure payback these loans have conditions attached which not all can agree to. Resolution will take time and if this overlaps the U.S. “fiscal cliff” at the end of the year, economic growth could slow further.

Yes
25% (1)

No
75% (3)

Europe’s debt crisis and fallout from Greece’s problems are far from resolved, especially since more issues loom with Italy and Spain. Although Greece wants to stay in the eurozone, they remain unwilling (or unable) to take on the reforms necessary, including bureaucracy cuts, tax code overhaul and labor law deregulation. Greeks blame everyone but themselves, while attempting to continue living beyond their own productivity. Greek insolvency is only the beginning, not the end, of Europe’s problems. Given the importance of U.S. exports to Europe, the lack of clear path forward will also continue to weigh the U.S. economy down.

While the newly elected Greek government wants to try to make the austerity plan work, it is uncertain that it will be able to do it, especially in the wake of a rioting on the streets. Greece may be the least of Europe’s problems, with the bigger economies of Spain and Italy having difficulties as well, which would have a more serious impact on Europe and the U.S. And while the elections in Greece went in favor of those favoring austerity, the elections in France went the other way, with the Socialists winning control and likely to go with more stimulus instead.

Unfortunately, I fear it is too late for Greece to pull itself out of this situation, even if starting today they were to do everything perfectly. Their debt load is simply too big relative to their ability to pay, and no one else is willing to pay it for them. The question is how to contain the damage within Greece, and that too is going to be very difficult. A few years ago, it was unthinkable to many people that any country would leave the euro. But once that door is open, everyone wonders who will be next, and it is an invitation for skyrocketing sovereign borrowing costs, possible bank runs, and tremendous financial instability.

In the sense that their crisis was temporarily averted. But obviously it's only a stop gap to a bigger problem with the PIGS (Portugal, Italy, Greece, Spain) that will keep impacting us until there is a permanent fix. I note that Greece has nothing to do with U.S. economic improvement. If there was not a Greek crisis, the U.S economy would still be sluggish. That this tiny, incompetent country's woes have anything to do with us seems otherworldly. Yet, the circumstances in Europe are tied to U.S. economic health because the world banking systems is bundled and not transparent. When the European crisis is resolved, the stock markets will rejoice, which is good for wealth recovery, but meaningless in terms of improving economic conditions. One silver lining: The persistance of the European crisis does translate into lower interest rates which should help our housing market recover faster.

By a slim margin some rational Greeks voted for the pro-austerity New Democracy party, essentially a vote to stay in the EU, but the multiple parties opposed to the austerity program actually won more votes, suggesting a coalition government that will abide by the austerity requirements of the EU is unlikely. Interest rates on Greek debt have not dropped suggesting they remain far riskier than junk bonds. Recent increases in yields on Spanish and Italian bonds also suggest that they are in greater financial trouble than ever. Ironically the higher rates on Spanish and Italian debt could hasten moving them closer to default.

Although the election outcome prevented an immediate crisis, German’s willingness to ease terms for financial assistance and Greece’s ability to follow through with any program remain in question. Problems with Spain and Italy loom. Europe must find a way to recapitalize the banks, create a large deposit insurance fund, enforce fiscal discipline, and reform structurally weak economies. In the United States, Congress must find a way to prevent a large rise in taxes and a sharp cut in spending from pummeling the U.S. into recession early next year. Difficult political decisions must be made on both sides of the Atlantic.

Letting the Greeks inside the eurozone was like letting the Trojan Horse inside Troy. The Greeks have bought a few months time to renegotiate their sovereign debt, which they cannot pay in full, even after a major writedown. Additional austerity will sink the Greek economy further, making the debt/GDP ratio higher and less sustainable. Radical reform of the Greek economy is necessary. The crisis will drag on, with Spain and Italy, both too big to fail, putting further pressure on the survival of the euro. The U.S. will escape the worst of it, with the Fed providing liquidity when needed.